Tennessee State Tax Audit Response

TENNESSEE STATE TAX AUDIT RESPONSE

TABLE OF CONTENTS

1. Engagement and Power of Attorney
2. Initial Audit Notice — Acknowledgment Letter
3. Document Preservation and Records Inventory
4. Information Document Request (IDR) Response
5. Position Statement on Disputed Audit Adjustments
6. Statute-of-Limitations Waiver Analysis
7. Closing Conference and Pre-Assessment Position
8. Penalty-Abatement Memorandum
9. Records Retention Memorandum
10. Tennessee Practice Notes
11. Sources and References

1. ENGAGEMENT AND POWER OF ATTORNEY

Power of Attorney filed: ☐ Yes — date filed [__/__/____] ☐ No — to be filed by [__/__/____]

(Use Tennessee Department of Revenue Form RV-F0103801, "Power of Attorney." All correspondence and IDRs should thereafter route through counsel of record.)

2. INITIAL AUDIT NOTICE — ACKNOWLEDGMENT LETTER

[LETTERHEAD]

[Date]

Tennessee Department of Revenue

Audit Division — [DISTRICT] Office

[Auditor Address]

Re: Acknowledgment of Audit Notice — [Taxpayer Name] — Account No. [________]

Audit Type: [Tax Type] — Periods [__/__/____] through [__/__/____]

Dear [Auditor Name]:

This firm represents the above-named Taxpayer in connection with the audit referenced above. A Tennessee Department of Revenue Power of Attorney (Form RV-F0103801) is enclosed; please direct all future correspondence, document requests, and scheduling communications to the undersigned.

The Taxpayer respectfully requests that the audit be conducted in accordance with the Tennessee Taxpayer Bill of Rights (T.C.A. § 67-1-110) and confirms its commitment to cooperate fully and produce records on a reasonable schedule.

Initial scheduling. We propose the following:

• Initial conference: [__/__/____] at [__:__] [☐ AM ☐ PM] [☐ in person at [LOCATION] / ☐ videoconference / ☐ telephone].
• Production location: [Taxpayer's office / Counsel's office / Department's office / Electronic upload via TNTAP].
• Format of records: [paper / electronic / both].

Preliminary requests. To facilitate efficient audit progression, please provide:

1. The Department's audit-plan summary identifying the subjects under examination;
2. A list of records and information the auditor anticipates requesting;
3. The auditor's proposed sampling methodology, if any (e.g., block sample, random statistical sample), with sufficient detail to evaluate stratification and projection methods;
4. Copies of any Department workpapers or schedules already prepared from third-party data;
5. Confirmation of the cut-off date for additional issues (i.e., the latest date by which all proposed adjustments will be communicated).

The Taxpayer reserves all rights, including the right to claim penalty abatement under T.C.A. § 67-1-803, the right to assert the statute of limitations under T.C.A. § 67-1-1501, the right to request an Informal Conference under T.C.A. § 67-1-1438, and the right to seek judicial review in chancery court under T.C.A. § 67-1-1801.

We look forward to working cooperatively with your office.

Respectfully,

[________________________________]

[ATTORNEY NAME], TN BPR No. [____]

Counsel for [Taxpayer]

Enclosure: Form RV-F0103801

3. DOCUMENT PRESERVATION AND RECORDS INVENTORY

3.1. Litigation / Audit Hold Notice (issued internally by Taxpayer):

• Date issued: [__/__/____]
• Custodians notified: [________________________________]
• Scope: All records (paper and electronic) relating to [tax type] for periods [__/__/____] through [__/__/____].
• Auto-deletion suspended: ☐ email ☐ point-of-sale data ☐ accounting system archives ☐ ESI backups
• Confirmation receipts collected: ☐ Yes ☐ No

3.2. Records Inventory Checklist:

3.3. ESI Preservation Confirmation: ☐ Confirmed in writing by IT on [__/__/____]

4. INFORMATION DOCUMENT REQUEST (IDR) RESPONSE

[LETTERHEAD]

[Date]

Tennessee Department of Revenue

[Auditor Name]

Re: Response to IDR No. [____] dated [__/__/____] — [Taxpayer Name] — Account No. [________]

Dear [Auditor Name]:

In response to the above-referenced Information Document Request, please find enclosed (or available via secure link / TNTAP upload at [URL]) the following materials. The Taxpayer has produced documents within its possession, custody, or control after a reasonable and good-faith search.

General Objections and Reservations.

4.1. Production of any document does not constitute a waiver of any claim of privilege (attorney-client, work product, accountant-client under T.C.A. § 62-1-116, federally authorized tax practitioner privilege under IRC § 7525 to the extent applicable), the statute of limitations (T.C.A. § 67-1-1501), or any other right or defense.

4.2. The Taxpayer objects to any IDR item that (a) seeks documents outside the audit period, (b) is unduly burdensome or duplicative of records already produced, (c) seeks documents protected by privilege, or (d) seeks information that the Department already possesses.

4.3. Extension Request. Item [____] is voluminous. The Taxpayer respectfully requests an extension to [__/__/____] to complete production. Confirmation of agreement is appreciated.

4.4. Privilege Log. A privilege log identifying any withheld documents will be provided within fifteen (15) days of any document being withheld on a privilege ground.

4.5. Sampling. If any IDR item invites a statistical sample, the Taxpayer requests prior agreement on the population, the sampling frame, the sample size, and the projection methodology, consistent with the Department's Audit Manual and accepted statistical practice.

4.6. Confidentiality. All produced materials contain confidential taxpayer information protected by T.C.A. § 67-1-1437 and federal IRC § 6103. Each page is stamped "CONFIDENTIAL — TAX INFORMATION".

Respectfully,

[________________________________]

[ATTORNEY / CPA NAME]

Counsel / Representative for Taxpayer

5. POSITION STATEMENT ON DISPUTED AUDIT ADJUSTMENTS

5.1. Adjustment-by-Adjustment Analysis Table:

5.2. Adjustment 1 — [Title].

• Department's theory: [________________________________]
• Taxpayer's response: [________________________________]
• Statutory authority: [T.C.A. § _________________; Rule 1320-_____]
• Cases / Letter Rulings: [________________________________]
• Documentary support: [Bates / Exhibit refs]
• Requested resolution: withdraw entire adjustment; alternatively reduce to $[____].

5.3. Adjustment 2 — [Title]. (Repeat structure.)

5.4. Adjustment 3 — [Title]. (Repeat structure.)

6. STATUTE-OF-LIMITATIONS WAIVER ANALYSIS

6.1. General Rule. T.C.A. § 67-1-1501 bars assessment more than three (3) years after a return is filed, extended to six (6) years if 25% or more of tax is omitted, and removed altogether for false or fraudulent returns or non-filing.

6.2. Pending Department Request to Extend. The Department has requested [Form RV-F1407001 / written waiver] extending the assessment period for tax type(s) [____________] to [__/__/____].

6.3. Considerations Before Signing:

• ☐ Audit is genuinely ongoing and likely to produce favorable adjustments if more time permits.
• ☐ Refusal to extend will trigger an immediate jeopardy or protective assessment that may be inflated.
• ☐ Limit waiver to specific issues (issue-restricted waiver) where possible.
• ☐ Ensure waiver does not extend periods already barred.
• ☐ Document Taxpayer's informed consent in writing.

6.4. Recommendation: ☐ Sign as drafted ☐ Sign with issue limitation ☐ Decline ☐ Counter-propose

7. CLOSING CONFERENCE AND PRE-ASSESSMENT POSITION

[LETTERHEAD]

[Date]

Tennessee Department of Revenue

[Audit Manager]

Re: Pre-Assessment Position Statement — [Taxpayer] — Account No. [________]

Dear [Audit Manager]:

This pre-assessment position statement is submitted in advance of the closing conference scheduled for [__/__/____]. The Taxpayer respectfully requests that the Department's auditor and audit manager review the points below and consider revisions to the proposed adjustments before issuing any Notice of Proposed Assessment.

7.1. Summary of Issues Resolved at Audit: [________________________________]

7.2. Summary of Issues Remaining in Dispute: see Section 5 above (incorporated by reference).

7.3. Proposed Penalty Treatment: Taxpayer requests waiver under T.C.A. § 67-1-803 for the reasons set forth in Section 8.

7.4. Settlement Posture. Without prejudice to any rights or defenses, and reserving the right to request an Informal Conference under T.C.A. § 67-1-1438 if a Notice of Proposed Assessment issues, the Taxpayer is prepared to discuss [________________________________].

7.5. If a Notice of Proposed Assessment is Issued. The Taxpayer will timely file a written request for Informal Conference within thirty (30) days under T.C.A. § 67-1-1438 and reserves the right to file suit in chancery court within ninety (90) days after any final assessment under T.C.A. § 67-1-1801.

Respectfully,

[________________________________]

[ATTORNEY NAME]

Counsel for [Taxpayer]

8. PENALTY-ABATEMENT MEMORANDUM

8.1. Statutory Authority. T.C.A. § 67-1-803 authorizes the Commissioner to waive penalty upon a showing of reasonable cause and the absence of willful neglect. The Department's penalty-waiver guidelines (Important Notice and the Penalty Waiver Petition Form RV-F1408301) elaborate the standard.

8.2. Reasonable-Cause Factors Asserted (check all applicable):

• ☐ Reliance on a Tennessee Letter Ruling, Important Notice, or written advice.
• ☐ Reliance on a qualified tax professional after full disclosure of facts.
• ☐ Erroneous Department advice, written or oral, with date and identity recorded.
• ☐ First-time error in long compliance history (clean compliance for prior [__] periods).
• ☐ Death, serious illness, or unavoidable absence of the responsible party.
• ☐ Fire, casualty, natural disaster, or other event beyond control.
• ☐ Software or system failure with documented remediation.
• ☐ Ambiguous or recently changed law / Department position.
• ☐ Prompt voluntary correction upon discovery.

8.3. Documentary Support: [list exhibits — written advice, ruling letters, illness records, software vendor confirmations, prior compliance history printout, etc.].

8.4. Requested Relief: Full abatement of all penalties; alternatively, abatement of [____]% of penalties.

8.5. Petition for Waiver of Penalty (Form RV-F1408301): ☐ filed ☐ to be filed by [__/__/____].

9. RECORDS RETENTION MEMORANDUM

9.1. General Tennessee Rule. T.C.A. § 67-1-1502 and Tenn. Comp. R. & Regs. 1320-05-01-.06 require taxpayers to maintain records sufficient to determine the correct tax. The Department generally requires retention for at least three (3) years after the return-filing date, extended to match any longer assessment-limitation period.

9.2. Recommended Retention Periods (Tennessee-focused):

9.3. Electronic Records. Tennessee accepts electronic records that are accessible and accurately reproduce the original. Provide on demand in a format the auditor can reasonably read.

9.4. Destruction Schedule. No record subject to a current audit, assessment, refund claim, or unresolved RAR may be destroyed. Suspend ordinary destruction schedules immediately upon receipt of any audit notice.

10. TENNESSEE PRACTICE NOTES

• Hall Income Tax repealed. Effective for tax years beginning on or after January 1, 2021, the Hall Income Tax (T.C.A. §§ 67-2-101 et seq.) is fully repealed. Modern Tennessee Department of Revenue audits focus on Sales & Use, Franchise & Excise, Business Tax, Tobacco, Motor Fuel, and Liquor-by-the-Drink. Decline any audit framing that presumes a current personal income tax.
• Confidentiality. T.C.A. § 67-1-1437 protects taxpayer information held by the Department; auditors are bound by criminal-penalty confidentiality. Mark sensitive submissions accordingly.
• Privilege landscape. Tennessee recognizes attorney-client and work-product privileges. The accountant-client privilege under T.C.A. § 62-1-116 is narrower than the federal IRC § 7525 privilege and does not extend to criminal matters; do not assume CPA communications are protected without a Kovel arrangement.
• Audit Manual. The Department's Audit Manual (internal, partially public) governs sampling, write-up, and managerial review. Reference it when contesting projection methodologies.
• TNTAP. The Tennessee Taxpayer Access Point (tntap.tn.gov) is the official portal for filings, account access, payments, and certain audit submissions. Many auditors prefer secure TNTAP uploads over email.
• Voluntary Disclosure Agreement (VDA). A VDA generally limits the look-back to three years and waives most penalties. VDAs must be initiated before the Department contacts the Taxpayer; once an audit notice issues, VDA eligibility is foreclosed.
• Successor liability. T.C.A. § 67-6-513 (sales tax) and § 67-1-1402 (general successor liability) impose successor liability on asset purchasers; tax-clearance certificates are commonly required at closing.
• Federal RAR adjustments. Taxpayers must report federal audit changes to Tennessee under T.C.A. § 67-1-1503; failure to do so extends the limitations period.
• Sampling protocols. Tennessee allows statistical sampling but the Taxpayer should agree to the methodology in writing before production. Errors in stratification can dwarf the underlying issue when projected.
• Closing conference. Always request a closing conference. T.C.A. § 67-1-110 includes the right to a clear explanation of any proposed adjustment; use the conference to surface unresolved issues before the NOPA issues.
• 30-day informal conference clock. Once a NOPA issues, the 30-day window to request an Informal Conference under T.C.A. § 67-1-1438 is firm. Calendar from the date on the face of the notice. Failure to request makes the assessment final on day 31, leaving only the 90-day chancery-court route or pay-and-refund.

11. SOURCES AND REFERENCES

• T.C.A. Title 67 — https://www.capitol.tn.gov/
• T.C.A. § 67-1-110 (Taxpayer Bill of Rights)
• T.C.A. § 67-1-803 (Penalty waiver)
• T.C.A. § 67-1-1437 (Confidentiality)
• T.C.A. § 67-1-1438 (Informal Conference) — https://law.justia.com/codes/tennessee/title-67/chapter-1/part-14/section-67-1-1438/
• T.C.A. § 67-1-1501 (Limitations on assessment)
• T.C.A. § 67-1-1502 (Records retention)
• T.C.A. § 67-1-1503 (Federal change reporting)
• T.C.A. §§ 67-1-1801 to 67-1-1808 (Taxpayer Remedies for Disputed Taxes)
• Tenn. Comp. R. & Regs. 1320-05-01 (Sales & Use Tax Rules)
• Tennessee Department of Revenue — Compliance Information — https://www.tn.gov/revenue/tax-resources/compliance-information.html
• Hearing Office — Informal Conferences — https://www.tn.gov/revenue/tax-resources/compliance-information/request-an-informal-conference.html
• Form RV-F0103801 (Power of Attorney)
• Form RV-F1408301 (Penalty Waiver Petition)
• Audit Frequently Asked Questions — https://revenue.support.tn.gov/hc/en-us/sections/200489519
• TNTAP Portal — https://tntap.tn.gov
• Hall Income Tax Repeal Bulletin (HIT-3) — https://revenue.support.tn.gov/hc/en-us/articles/360057828631
• Tennessee Voluntary Disclosure Program — https://www.tn.gov/revenue/tax-resources/compliance-information/voluntary-disclosure.html

Disclaimer: This template is provided for informational purposes only and does not constitute legal advice. A Tennessee-licensed attorney or CPA must review and customize this document for the specific audit, taxpayer, and procedural posture before use. Audit cooperation, IDR responses, waivers, and pre-assessment representations have lasting consequences that can foreclose later defenses; do not file or sign without professional review.